What Pairs to Trade During the Tokyo Session?

The foreign exchange (forex) market operates continuously globally, allowing currency trading 24 hours a day, five days a week. Understanding each trading session’s characteristics is important for effective market navigation. The Tokyo trading session, as the first major session to open daily, sets the initial market tone for the global trading day.

Characteristics of the Tokyo Trading Session

The Tokyo trading session, also known as the Asian session, runs from midnight to 9:00 AM Greenwich Mean Time (GMT). For US traders, this is roughly 7:00 PM EST to 4:00 AM EST (4:00 PM PST to 1:00 AM PST). This session exhibits lower volatility and more subdued price movements compared to the London and New York sessions.

Despite its quieter nature, the Tokyo session sets the initial sentiment and trends for the global trading day. Liquidity is moderate, particularly in pairs involving the Japanese Yen, Australian Dollar, and New Zealand Dollar. While overall trading volumes are lower, the session presents opportunities, especially around key economic data releases from the Asia-Pacific region.

Primary Currency Pairs for Trading

During the Tokyo trading session, certain currency pairs are more active, primarily those linked to the region’s economies. The Japanese Yen (JPY) is a central player, influencing many crosses. The USD/JPY pair is one of the most active and liquid, experiencing significant trading volume as Japanese equity markets open. Its movements are sensitive to economic data and monetary policy decisions from Japan’s and the United States’ central banks.

Other JPY crosses, such as EUR/JPY and GBP/JPY, also see activity, with moderate volatility. The EUR/JPY offers steady price action, sometimes guiding expectations for the upcoming London session. The GBP/JPY, while having wider spreads during Tokyo hours, presents opportunities, especially as the session transitions towards the London open.

Pairs involving the Australian Dollar (AUD) and New Zealand Dollar (NZD) are prominent due to geographical proximity and overlapping trading hours with the Sydney market. AUD/USD and NZD/USD are active, with their movements influenced by commodity prices and economic data from Australia and New Zealand. AUD/JPY and NZD/JPY are favored due to interest rate differentials supporting carry trade strategies and their responsiveness to regional economic data.

Factors Influencing Trading Opportunities

Currency pair movements during the Tokyo session are influenced by external factors. Economic data releases from Japan, Australia, and New Zealand cause market reactions. Key indicators to monitor include:
Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Employment figures
Trade balance reports
For example, a stronger-than-expected inflation report from Australia could lead to increased volatility in AUD pairs.

Central bank actions and statements play a role. Announcements from the Bank of Japan (BOJ), the Reserve Bank of Australia (RBA), and the Reserve Bank of New Zealand (RBNZ) impact their respective currencies. Shifts in monetary policy or forward guidance from these institutions trigger significant price movements. For instance, a surprising interest rate decision from the RBNZ could cause immediate and sustained volatility in NZD pairs.

Global market sentiment, often “risk-on” or “risk-off,” influences trading in the Tokyo session. The Japanese Yen is considered a safe-haven currency, strengthening during global economic uncertainty as investors seek safer assets. Conversely, during increased risk appetite, the JPY may weaken. This sentiment can spill over from the preceding New York session or set the tone for subsequent sessions, affecting JPY and other Asia-Pacific currencies.

Trading Approaches for the Tokyo Session

Given the Tokyo session’s characteristics, certain trading approaches are suitable. Range trading strategies are employed due to the session’s lower volatility, which leads to price action staying within defined support and resistance levels. Traders identify these boundaries and aim to buy near support and sell near resistance, capitalizing on predictable movements. This approach benefits from the market’s tendency to consolidate after the more volatile New York session.

While lower volatility is common, breakout trading opportunities emerge, particularly around key news releases or as the session transitions. Economic data announcements from Japan, Australia, or New Zealand provide catalysts for price to break out of established ranges. The overlap with the London session, which begins towards the end of Tokyo hours, introduces increased liquidity and volatility, potentially leading to breakouts.

The Tokyo session serves as a period for preparation ahead of the London and New York sessions. Traders use this time to gauge initial market sentiment, observe how currency pairs react to early economic data, and establish positions. Awareness of lower liquidity and wider spreads during certain parts of the Tokyo session is important, as these conditions impact trade execution and costs.